UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number: 0-27488
INCYTE GENOMICS, INC.
(FORMERLY KNOWN AS INCYTE PHARMACEUTICALS, INC.)
(Exact name of registrant as specified in its charter)
Delaware 94-3136539
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3160 Porter Drive
Palo Alto, California 94304
(Address of principal executive offices)
(650) 855-0555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 31,987,612 as of June 30, 2000.
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INCYTE GENOMICS, INC.
INDEX
PART I: FINANCIAL INFORMATION PAGE
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<S> <C>
ITEM 1 Financial Statements - Unaudited
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 7
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. 11
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . 26
PART II: OTHER INFORMATION
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ITEM 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 2 Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 3 Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 4 Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 28
ITEM 5 Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
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INCYTE GENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<S> <C> <C>
JUNE 30, DECEMBER 31,
2000 1999
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 438,113 $ 32,220
Marketable securities - available-for-sale. . . . . . . . . 242,805 34,717
Accounts receivable, net. . . . . . . . . . . . . . . . . . 14,732 26,608
Prepaid expenses and other current assets . . . . . . . . . 15,458 15,956
---------- -----------
Total current assets. . . . . . . . . . . . . . . . . 711,108 109,501
Property and equipment, net . . . . . . . . . . . . . . . . . . . 87,930 67,293
Long-term investments . . . . . . . . . . . . . . . . . . . . . . 46,108 19,275
Goodwill and other intangible assets, net . . . . . . . . . . . . 13,369 14,564
Deposits and other assets . . . . . . . . . . . . . . . . . . . . 18,120 11,301
---------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . $ 876,635 $ 221,934
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . $ 13,547 $ 6,501
Accrued compensation. . . . . . . . . . . . . . . . . . . . 11,055 6,731
Accrued and other current liabilities . . . . . . . . . . . 15,416 11,767
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 31,384 26,459
---------- -----------
Total current liabilities . . . . . . . . . . . . . . 71,402 51,458
Non-current portion of capital lease obligations and note payable - 194
Convertible subordinated notes. . . . . . . . . . . . . . . . . . 203,292 -
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . 274,694 51,652
---------- -----------
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . . . . . . . . . 32 29
Additional paid-in capital. . . . . . . . . . . . . . . . . 645,308 222,805
Deferred compensation . . . . . . . . . . . . . . . . . . . (441) (806)
Receivable from stockholders. . . . . . . . . . . . . . . . - (20)
Accumulated other comprehensive income. . . . . . . . . . . 26,978 3,443
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (69,936) (55,169)
---------- -----------
Total stockholders' equity. . . . . . . . . . . . . . 601,941 170,282
---------- -----------
Total liabilities and stockholders' equity. . . . . . $ 876,635 $ 221,934
========== ===========
See accompanying notes
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INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- -------- --------- --------
Revenues. . . . . . . . . . . . . . . . $ 46,015 $37,893 $ 86,769 $75,523
Costs and expenses:
Research and development . . . . . . . 45,407 36,122 86,741 67,366
Selling, general and administrative. . 15,000 9,497 29,821 17,876
--------- -------- --------- --------
Total costs and expenses. . . . . . . . 60,407 45,619 116,562 85,242
--------- -------- --------- --------
Loss from operations. . . . . . . . . . (14,392) (7,726) (29,793) (9,719)
Interest and other income, net. . . . . 10,813 1,637 21,217 3,169
Interest expense. . . . . . . . . . . . (3,011) (81) (4,908) (154)
Losses from joint venture . . . . . . . - (1,217) (1,283) (2,593)
--------- -------- --------- --------
Net loss. . . . . . . . . . . . . . . . $ (6,590) $(7,387) $(14,767) $(9,297)
========= ======== ========= ========
Basic and diluted net loss per share. . $ (0.21) $ (0.26) $ (0.47) $ (0.33)
========= ======== ========= ========
Shares used in computing
basic and diluted net loss per share 31,899 27,961 31,103 27,920
========= ======== ========= ========
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See accompanying notes
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INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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<S> <C> <C> <C> <C>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- --------- ---------
Net loss. . . . . . . . . . . . . . $(6,590) $(7,387) $(14,767) $ (9,297)
Other comprehensive income (loss),
net of taxes:
Unrealized gains (losses) on
marketable securities. . . 822 (693) 23,652 (1,095)
Foreign currency translation
adjustments. . . . . . . . (119) (47) (117) (197)
-------- -------- --------- ---------
Other comprehensive income (loss) . 703 (740) 23,535 (1,292)
-------- -------- --------- ---------
Comprehensive income (loss) . . . . $(5,887) $(8,127) $ 8,768 $(10,589)
======== ======== ========= =========
</TABLE>
See accompanying notes
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INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<S> <C> <C>
SIX MONTHS ENDED
JUNE 30,
2000 1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:. . . . . . . . . . . . . . . . . $ (14,767) $ (9,297)
Net loss
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 16,529 13,184
Losses in joint venture . . . . . . . . . . . . . . . . . . . 1,283 2,593
Gain on sale of long-term investment. . . . . . . . . . . . . (5,417) (104)
Changes in certain assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . 11,876 9,724
Prepaid expenses and other assets. . . . . . . . . . . . (2,138) (5,507)
Accounts payable . . . . . . . . . . . . . . . . . . . . 7,046 (3,647)
Accrued and other current liabilities. . . . . . . . . . 8,190 778
Deferred revenue . . . . . . . . . . . . . . . . . . . . 4,925 5,988
---------- ---------
Net cash provided by operating activities. . . . . . . . . . . . . . . 27,527 13,712
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of long-term investment. . . . . . . . . . . . . . . . . (6,865) -
Proceeds from the sale of long-term investments . . . . . . . . . 7,917 565
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . (33,488) (19,968)
Purchases of marketable securities. . . . . . . . . . . . . . . . (299,747) (23,013)
Sales and maturities of marketable securities . . . . . . . . . . 91,561 30,988
---------- ---------
Net cash used in investing activities. . . . . . . . . . . . . . . . . (240,622) (11,428)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options. . . . . . . . . 24,407 1,751
Proceeds from issuance of common stock, net . . . . . . . . . . . 398,290 -
Proceeds from the issuance of convertible subordinated notes, net 196,800 -
Repayment of receivable from stockholder. . . . . . . . . . . . . 20 4
Principal payments on capital lease obligations and note payable. (411) (606)
---------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . . 619,106 1,149
---------- ---------
Effect of exchange rate on cash and cash equivalents . . . . . . . . . (118) (197)
---------- ---------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . 405,893 3,236
Cash and cash equivalents at beginning of period . . . . . . . . . . . 32,220 50,048
---------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 438,113 $ 53,284
========== =========
</TABLE>
See accompanying notes
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======
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
Incyte Genomics, Inc. (the "Company") was incorporated in Delaware in
April 1991 under the name Incyte Pharmaceuticals, Inc. In June 2000, the
Company's stockholders approved the amendment to the Company's Certificate of
Incorporation to change the Company's name to Incyte Genomics, Inc. The Company
designs, develops, and markets genomic information-based tools including
database products, genomic data management software tools, microarray-based gene
expression services and genomic reagents and related services. The Company's
genomic databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
tools used by pharmaceutical and biotechnology companies and academic
researchers to understand disease and to discover and develop drugs.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The consolidated balance sheet as of June 30, 2000, statements
of operations for the three and six months ended June 30, 2000 and 1999,
statements of comprehensive income (loss) for the three and six months ended
June 30, 2000 and 1999 and the statements of cash flows for the six months ended
June 30, 2000 and 1999 are unaudited, but include all adjustments (consisting of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position, operating results and cash flows for the
periods presented. The balance sheet at December 31, 1999 has been derived from
audited financial statements.
Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results
for any future interim period or for the entire year. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
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<S> <C> <C>
JUNE 30, DECEMBER 31,
2000 1999
---------- --------------
Office equipment . . . . . . . . . . . . . . . $ 4,942 $ 4,630
Laboratory equipment . . . . . . . . . . . . . 28,655 25,297
Software and computer equipment. . . . . . . . 77,557 52,565
Leasehold improvements . . . . . . . . . . . . 41,778 37,941
---------- --------------
152,932 120,433
Less accumulated depreciation and amortization (65,002) (53,140)
---------- --------------
$ 87,930 $ 67,293
========== ==============
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4. CONVERTIBLE SUBORDINATED NOTES
In February 2000, in a private placement, the Company issued $200
million of convertible subordinated notes, which resulted in net proceeds of
approximately $196.8 million. The notes bear interest at 5.5%, payable
semi-annually on February 1 and August 1, and are due February 1, 2007. The
notes are subordinated to all senior indebtedness, as defined. The notes can be
converted at the option of the holder at an initial conversion price of $134.84
per share, subject to adjustment. The Company may, at its option, redeem the
notes at any time before February 7, 2003, but only if the Company's stock price
exceeds 150% of the conversion price for 20 trading days in a period of 30
consecutive trading days. On or after February 7, 2003 the Company may, at its
option, redeem the notes at specific prices. Holders may require the Company to
repurchase the notes upon a change in control, as defined.
5. REVENUE RECOGNITION
Revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectibility is reasonably assured. For database
collaboration agreements, revenues are recognized evenly over the term of each
agreement. Revenue is deferred for fees received before earned. Revenues from
custom orders, such as custom sequencing, and reagents are recognized upon
completion and delivery. Revenues from genomic screening services are recognized
upon completion. Revenue from gene expression microarray services includes;
technology access fees, which are generally recognized ratably over the access
term, and usage fees which are recognized at the completion of key stages in the
performance of the service, in proportion to costs incurred. In accordance with
SOP 97-2, software revenue is allocated between license fees and maintenance
fees with the license revenue being recognized upon installation, and
maintenance fees recognized evenly over the maintenance term.
6. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations for the periods presented
below.
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<S> <C> <C> <C> <C>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- --------- --------
Numerator:
Net loss . . . . . . . . . . . . . . . $(6,590) $(7,387) $(14,767) $(9,297)
======== ======== ========= ========
Denominator:
Denominator for basic net loss
per share - weighted-average shares 31,899 27,961 31,103 27,920
Dilutive potential common shares-
stock options . . . . . . . . . . . - - - -
-------- -------- --------- --------
Denominator for diluted net loss
per share. . . . . . . . . . 31,899 27,961 31,103 27,920
======== ======== ========= ========
Basic and diluted net loss per share. . $ (0.21) $ (0.26) $ (0.47) $ (0.33)
======== ======== ========= ========
</TABLE>
Options to purchase 4,197,660 and 5,053,779 shares of common stock
were outstanding at June 30, 2000 and 1999, respectively, and notes convertible
into 1,483,250 shares of common stock were outstanding at June 30, 2000, but
were not included in the computation of diluted net loss per share, as their
effect was anti-dilutive.
<PAGE>
7. JOINT VENTURE
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which utilizes genomic
and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company held a 50 percent equity interest in diaDexus
and accounted for the investment under the equity method. In July 1999, the
Company and SB each invested an additional $2.5 million in diaDexus through
convertible notes.
On April 6, 2000, diaDexus obtained additional financing through a private
equity offering. In conjunction with the offering, diaDexus repaid in full the
$2.5 million principal amount of, together with accrued interest on, the
convertible note held by the Company. Under diaDexus' new capital structure, the
Company no longer has the ability to exert significant influence over diaDexus.
Accordingly, the Company accounts for its investment in diaDexus under the cost
method of accounting as of the date of the financing.
diaDexus purchased $0.7 million and $1.3 million of contract sequencing and
microarray services from the Company in the three and six months ended June 30,
2000, respectively. diaDexus did not make similar purchases in 1999.
8. SEGMENT REPORTING
The Company operates primarily in one reportable segment: the design,
development, and marketing of genomic information-based tools, and follows the
requirements of SFAS 131, Disclosures about Segments of an Enterprise and
Related Information. For the three and six months ended June 30, 2000, the
Company recorded revenue from customers throughout the United States and in
Canada, Austria, Belgium, France, Germany, Israel, Japan, Netherlands,
Switzerland, and the United Kingdom. Export revenue for the three and six months
ended June 30, 2000 were $11,594,000 and $23,438,000, respectively, and
$9,797,000 and $20,580,000 for the three and six months ended June 30, 1999,
respectively.
9. NEW PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. ("SFAS 133"). SFAS 133
established standards for accounting and reporting derivative instruments and
hedging activities. Application of SFAS 133 had no impact on the consolidated
financial position or results of operations as currently reported.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on accounting
for non-refundable up-front fees. The Company is currently evaluating SAB 101 as
to whether it would have any material impact on the Company. Should the Company
determine that a change in its accounting policy is necessary, such a change
will be made effective in the fourth quarter of 2000 and would result in a
charge to results of operations for the cumulative effect of the change. This
amount, if recognized, would be recorded as deferred revenue and recognized as
revenue in future periods. Financial statements prior to January 1, 2000 will
not be restated.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which contains
rules designed to clarify the application of APB 25. FIN 44 will be effective on
July 1, 2000 and the Company will adopt it at that time. The Company believes
the anticipated impact of adoption of FIN 44 will not be material to the
operating results and financial position of the Company.
10. LITIGATION
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in
the United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the " '934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees and
interest. Affymetrix further requests that any such damages be trebled based on
its allegation of willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of the U.S. patent number
5,800,992 (the " '992 Patent") and U.S. patent number 5,744,305 (the " '305
Patent") by both Synteni and Incyte. The complaint alleges that the '305 Patent
has been infringed by the making, using, selling, importing, distributing or
offering to sell in the United States high density arrays by Synteni and Incyte,
that the '992 Patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling, and that such infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. The court has scheduled a pretrial hearing in
November 2000 to determine how to construe the patent claims that will be
litigated in trial, but has not scheduled any other pretrial hearings or set a
trial date.
In April 1999, the Board of Patent Appeals and Interferences of the
United States Patent and Trademark Office (PTO) declared interferences between
pending patent applications licensed exclusively to Incyte and the Affymetrix
'305 and '992 Patents. An interference proceeding is invoked by the PTO when
more than one patent applicant claims the same invention. The Board of Patent
Appeals and Interferences evaluates all relevant facts, including those bearing
on first to invent, validity, enablement and scope of claims, and then makes a
determination as to who, if anyone, is entitled to the patent on the disputed
invention. In September 1999, the Board of Patent Appeals and Interferences
determined that Incyte had not met its prima facie case, and ruled that the
patents licensed by Incyte and Synteni from Stanford University were not
entitled to priority over corresponding claims in the two Affymetrix patents.
The Company is seeking de novo review of the Board decisions in the United
States District Court for the Northern District of California.
Incyte and Synteni believe they have meritorious defenses and intend to
defend the suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of this suit or the outcome thereof would be made available
on commercially acceptable terms, if at all.
11. PRIVATE PLACEMENT OF EQUITY
In February 2000, in a private placement, the Company issued 2,000,000 of
its common stock at a price of $211.00 per share, resulting in net proceeds of
$398.3 million.
12. SUBSEQUENT EVENTS
In July 2000, the Company's board of directors approved a two-for-one stock
split in the form of a stock dividend. Stockholders of record at the close of
August 7, 2000 will receive one additional share for each share of common stock
held at the time. The additional shares will be distributed to eligible
stockholders on August 31, 2000. The accompanying financial statements do not
reflect the effects of this stock split.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of June 30, 2000 and for the three and six month
periods ended June 30, 2000 and 1999 should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto set
forth in Item 1 of this report and the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include
statements as to expected net losses, expected cash flows, the adequacy of
capital resources, growth in operations, the ability to commercialize products
developed under collaborations and alliances, the ability to complete the
sequence of full-length genes in areas of therapeutic interest and file patents
on these potential drug targets, the ability to integrate companies and
operations that it has acquired or will acquire, the ability to implement online
delivery of its database and software products, the scheduling and timing of
litigation, the Company's strategy with regard to protecting its proprietary
technology, the ability to compete and respond to rapid technological change,
and the performance and utility of products and services. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and uncertainties
include, but are not limited to, the extent to which the pharmaceuticals and
biotechnology industries use genomic information in research and development,
risks relating to development of new products and services and their use by the
Company's potential customers and collaborators, the Company's ability to work
with its collaborators to meet the goals of collaborators and alliances, the
Company's ability to retain and obtain customers, the cost of accessing or
acquiring technologies or intellectual property, the effectiveness of the
Company's sequencing efforts, the impact of alternative technological advances
and competition, uncertainties associated with changes in patent laws,
developments in and expenses related to litigation and interference proceedings,
and the matters discussed in "Factors That May Affect Results." These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
Incyte, LifeSeq and PathoSeq are our registered trademarks. ZooSeq,
LifeTools, LifeArray, LifeProt, LifeExpress, GeneAlbum and GEM are our
trademarks. We also refer to trademarks of other corporations and organizations
in this document.
OVERVIEW
Incyte Genomics, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") designs, develops and markets genomic
information-based products and services. These products and services include
database products, genomic data management software tools, microarray-based gene
expression services, genomic reagents, and related services. The Company's
genomic databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
products and services used by pharmaceutical and biotechnology companies and
academic researchers to understand disease and to discover and develop drugs.
In July 2000, the Company's board of directors approved a two-for-one stock
split in the form of a stock dividend. Incyte stockholders of record at the
close of August 7, 2000 will receive one additional share for each share of
common stock held at the time. The additional shares will be distributed to
eligible stockholders on August 31, 2000.
Revenues recognized by the Company consist primarily of non-exclusive
database access fees related to database agreements. Revenues also include the
sales of genomic screening products and services, fees for contract sequencing
services, sales of genomic data management software tools, and fees for
microarray-based gene expression services. The Company's database agreements
provide for future milestone payments and royalties from the sale of products
derived from proprietary information obtained through the databases. There can
be no assurance that any database subscriber will ever generate products from
information contained within the databases and thus that the Company will ever
receive additional milestone payments or royalties. The Company's ability to
maintain and increase revenues depends on its ability to obtain additional
database subscribers, to retain existing subscribers, to expand its product and
service offerings and to expand its customer base. The loss of revenues from any
individual database agreement, if terminated or not renewed, could have an
adverse impact on the Company's results of operations, although it is not
anticipated to have a material adverse impact on the Company's business or
financial conditions.
The Company is investing in its sequencing, bioinformatics, expression
database development, SNP discovery, internet and e-commerce programs in 2000
and as a result expects to report a net loss at least through 2000. If the costs
of these programs are greater than anticipated, or if these programs take longer
to complete, or if losses are incurred from strategic investments, the Company
may incur losses in future periods, as well.
The Company has made and intends to continue to make strategic equity
investments in, and acquisitions of, technologies and businesses that are
complementary to the businesses of the Company. As a result, the Company may
record losses or expenses related to the Company's proportionate ownership
interest in such long-term equity investments, record charges for the
acquisition of in-process technologies, or record charges for the recognition of
the impairment in the value of the securities underlying such investments.
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which utilizes genomic
and bioinformatics technologies in the discovery and commercialization of
molecular diagnostics. Through April 6, 2000, the Company and SB each held a 50
percent equity interest in diaDexus, during which time the investment was
accounted for under the equity method of accounting. On April 6, 2000, diaDexus
completed a private equity financing at which time the Company no longer had
significant influence over diaDexus. Accordingly, the Company began accounting
for its investment in diaDexus under the cost method of accounting as of the
date of the financing.
In January 1998, the Company announced a relationship relating to the joint
development of proteomics data and related software with Oxford GlycoSciences
plc ("OGS"). As part of this relationship, the Company has made a total of $5.8
million in equity investments in OGS. As part of the collaborative agreement,
the Company reimbursed OGS $5.0 million in 1999 for services rendered and will
reimburse OGS up to $5.0 million in 2000 to offset OGS' expenses for services
rendered. The market prices of the securities of the companies in which the
Company invests are highly volatile and therefore subject to declines in market
value. The Company will continue to evaluate its long-term equity investments
for impairment on a quarterly basis.
In an effort to broaden its business, the Company is investing in a number
of new areas, including molecular diagnostics, genome sequencing, SNP discovery,
proteomics, microarray services and the sale of its products over the internet.
Given that many of these address new markets, or involve untested technologies,
it is not known if any of them will generate revenues or if the revenues will be
sufficient to provide an adequate return on the investment. Depending on the
investment required and the timing of such investments, expenses or losses
related to these investments could adversely affect operating results.
The Company has incurred and may continue to incur substantial expenses in
its defense of the lawsuits filed in January and September 1998 by Affymetrix,
Inc. ("Affymetrix") alleging patent infringement by Synteni and Incyte.
Affymetrix seeks a preliminary injunction enjoining Incyte and Synteni from
using certain microarray technology in a manner alleged to infringe an
Affymetrix patent and a permanent injunction enjoining Incyte and Synteni from
further infringement of certain Affymetrix patents. In addition, Affymetrix
seeks damages, costs, attorneys' fees and interest. Affymetrix further requests
that any such damages be trebled on its allegation of willful infringement by
Incyte and Synteni. Incyte and Synteni believe they have meritorious defenses
and intend to defend these suits vigorously. However, there can be no assurance
that Incyte and Synteni will be successful in the defense of these suits. At
this time, the Company cannot reasonably estimate the possible range of any loss
related to these suits due to uncertainty regarding the ultimate outcome.
Regardless of the outcome, this litigation has resulted and is expected to
continue to result in substantial expenses and diversion of the efforts of
management and technical personnel. Any future litigation could result in
similar expenses and diversion of efforts. Further, there can be no assurance
that any license that may be required as a result of these suits or the outcome
thereof would be made available on commercially acceptable terms, if at all.
RESULTS OF OPERATIONS
Net loss and diluted net loss per share were $6.6 million and $14.8 million
and $0.21 and $0.47 per share for the three and six months ended June 30, 2000,
respectively, as compared to $7.4 million and $9.3 million and $0.26 and $0.33
per share in the corresponding periods in 1999. Diluted net loss per share for
the three and six months ended June 30, 2000 was impacted by a private equity
offering of 2,000,000 shares of common stock in February 2000.
Revenues for the three and six months ended June 30, 2000 increased to
$46.0 million and $86.8 million, respectively, compared to $37.9 million and
$75.5 million for the corresponding periods in 1999. Revenues resulted primarily
from database and related products and services and, to a lesser extent, from
the Company's custom genomics product line, which includes genomic screening
products and services, gene expression services and custom sequencing services.
The increase in revenues was primarily attributed to database agreements with
new customers, revenues from new products such as expression databases and in
silico Single Nucleotide Polymorphism ("isSNP") product as well as increased
revenues from custom genomics products and services.
Total costs and expenses for the three and six months ended June 30, 2000
increased to $60.4 million and $116.6 million, respectively, compared to $45.6
million and $85.2 million for the corresponding periods in 1999. Total costs and
expenses are expected to increase in the foreseeable future, although at a rate
slower than the first two quarters of 2000, due to the continued investment in
the development of new products and services, and in the expansion of the
Company's customer base.
Research and development expenses for the three and six months ended June
30, 2000 increased to $45.4 million and $86.7 million, respectively, compared to
$36.1 million and $67.4 million for the corresponding periods in 1999. The
increase in research and development expenses resulted primarily from an
increase in bioinformatics and software development efforts, SNP discovery
efforts, microarray production, expression database development, and the
development of internet and e-commerce products. The Company expects research
and development spending to increase as the Company continues to pursue the
development of new database products and services, expansion of existing
database products, increases in sequencing, bioinformatics, expression database
development and SNP discovery operations, development of internet and e-commerce
products and services and investments in new technologies.
Selling, general and administrative expenses for the three and six months
ended June 30, 2000 increased to $15.0 million and $29.8 million compared to
$9.5 million and $17.9 million for the corresponding periods in 1999. The
increase in selling, general and administrative expenses resulted primarily from
the growth in the Company's sales and marketing function, including its branding
efforts, and increased personnel to support the growing complexity of the
Company's operations. The Company's operations were also impacted by legal
expenses from the patent infringement lawsuits filed by Affymetrix of
approximately $1.5 million and $2.9 million in the three and six months ended
June 30, 2000, respectively and $2.0 million and $4.1 million in the
corresponding periods in 1999. The Company expects that selling, general and
administrative expenses will increase throughout 2000 due to continued growth in
marketing, sales and customer support functions, legal expenses related to the
Company's defense of the patent infringement lawsuit filed by Affymetrix and
increases in personnel to support the Company's growing complexity.
Interest and other income, net for the three and six months ended June 30,
2000 increased to $10.8 million and $21.2 million, respectively from $1.6
million and $3.2 million for the corresponding periods in 1999. The increase was
primarily due to increased interest income resulting from higher cash balances
from the Company's convertible subordinated note and private equity offerings in
February 2000, and a $5.4 million gain from the exercise and sale of a warrant
in a long-term strategic investment in March 2000.
Interest expense for the three and six months ended June 30, 2000 increased
to $3.0 million and $4.9 million, respectively, from $0.1 million and $0.2
million for the corresponding periods in 1999. The increase was due to the
issuance of $200 million of convertible subordinated notes issued in February
2000.
The Company incurred no losses from joint venture for the three months
ended June 30, 2000 and $1.3 million for the six months ended June 30, 2000
compared to $1.2 million and $2.6 million for the corresponding periods in 1999.
The loss represents the Company's share of diaDexus' losses from operations.
Beginning on April 6, 2000, the Company accounted for its investment in diaDexus
under the cost method of accounting and therefore did not reflect diaDexus'
losses in the Company's statement of operations in the three months ended June
30, 2000.
Due to the Company's expected loss in 2000, the Company expects a minimal
effective annual income tax rate, which is consistent with the corresponding
periods a year ago.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had $681.9 million in cash, cash
equivalents and marketable securities, compared to $66.9 million as of December
31, 1999. The Company has classified all of its marketable securities as
short-term, as the Company may choose not to hold its marketable securities
until maturity in order to take advantage of favorable market conditions.
Available cash is invested in accordance with the Company's investment policy's
primary objectives of liquidity, safety of principal and diversity of
investments.
Net cash provided by operating activities was $27.5 million for the six
months ended June 30, 2000, as compared to $13.7 million for the six months
ended June 30, 1999. The increase was primarily due to the increase in accounts
payable and accrued and other current liabilities in 2000 as compared to 1999.
These changes were partially offset by the higher net loss before non-cash
activities. Net cash generated by operating activities may in the future
fluctuate significantly from quarter to quarter due to the timing of large
prepayments by database collaborators.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted of capital expenditures and
long-term investments. Capital expenditures for the six months ended June 30,
2000 were $33.5 million as compared to $20.0 million in the same period in 1999,
primarily due to the expansion of the Company's facilities and increases in
software and computer equipment. The Company generated net proceeds of $5.4
million on the exercise of a warrant and sale of the underlying common shares in
one of its long term strategic investments and $2.5 million from the repayment
of a note from diaDexus in April 2000. The Company also made two long-term
strategic equity investments totaling $6.9 million. Net cash used by investing
activities may in the future fluctuate significantly from quarter to quarter due
to the timing of investments in and sales of strategic equity investments,
capital expenditures and maturity/sales and purchases of marketable securities.
In February 2000, in a private placement, the Company issued $200 million
of convertible subordinated notes, which resulted in net proceeds of
approximately $196.8 million. The notes bear interest at 5.5%, payable
semi-annually on February 1 and August 1, and are due February 1, 2007. The
notes are subordinated to senior indebtedness, as defined. The notes can be
converted at the option of the holder at an initial conversion price of $134.84
per share, subject to adjustment. The Company may redeem the notes at any time
before February 7, 2003, only if the Company's stock price exceeds 150% of the
conversion price for 20 trading days in a period of 30 consecutive trading days.
On or after February 7, 2003 the Company may redeem the notes at specific
prices. Holders may require the Company to repurchase the notes upon a change in
control, as defined.
In February 2000, in a private placement, the Company issued 2,000,000 of
its common stock at a price of $211.00 per share, resulting in net proceeds of
$398.3 million.
Net cash provided by financing activities was $619.1 million for the six
months ended June 30, 2000 as compared to $1.2 million for the corresponding
period in 1999. The 2000 activity included the net proceeds from the private
equity offering, the net proceeds from the convertible subordinated notes, and
the proceeds from the exercise of employee stock options of $24.4 million.
The Company expects its cash requirements to continue to increase in 2000
as it: invests in its sequencing, bioinformatics, expression database
development, and SNP discovery programs; invests in data-processing-related
computer hardware to support its existing and new database products and to
enable the on-line delivery of those products; continues to seek access to
technologies through investments, research and development alliances, license
agreements and/or acquisitions; makes strategic investments; continues to make
improvements in existing facilities; and invests in sales and marketing to
broaden its customer base.
Based upon its current plans, the Company believes that its existing
resources will be adequate to satisfy its capital needs for at least the next
twelve months. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for its
databases and other products and services; expenditures in connection with
alliances, license agreements and acquisitions of and investments in
complementary technologies and businesses; competing technological and market
developments; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; the purchase of additional
capital equipment, including capital equipment necessary to ensure the Company's
sequencing and microarray operations remain competitive; capital expenditures
required to expand the Company's facilities; and costs associated with the
integration of new operations assumed through mergers and acquisitions. Changes
in the Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources.
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002, but not later than July 1, 2002. During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency. The Company will evaluate the impact of
the euro conversion on its computer and financial systems, business processes,
market risk, and price competition. The Company does not expect this conversion
to have a material impact on its results of operations, financial position or
cash flows.
<PAGE>
FACTORS THAT MAY AFFECT RESULTS
The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial
condition and results of operations could be materially and adversely affected.
WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY, WE EXPECT TO INCUR LOSSES IN
THE FUTURE AND WE MAY NOT RETURN TO PROFITABILITY
We had net losses from inception in 1991 through 1996 and again incurred
net losses in 1999 and the six months ended June 30, 2000. Because of those
losses, we had an accumulated deficit of $69.9 million as of June 30, 2000. In
2000, we intend to continue to spend significant amounts on new product and
technology development, including making our products available online, and to
increase our investment in marketing, sales and customer service. The amounts we
intend to spend on new product and technology development include spending for
our efforts to determine the sequence of genes, or genomic sequencing, determine
gene functions, develop database and software products such as our gene
expression database, discover SNPs, expand research and development alliances,
and develop electronic commerce products. As a result, we expect to report a net
loss for the year ending December 31, 2000. We may report net losses in future
periods as well. We will not return to profitability unless we increase our
revenues.
TO GENERATE SIGNIFICANT REVENUES AND RETURN TO PROFITABILITY, WE MUST OBTAIN
ADDITIONAL DATABASE COLLABORATORS AND RETAIN EXISTING COLLABORATORS
As of June 30, 2000, we had over 20 database agreements. If we are unable
to enter into additional agreements we will not generate additional revenues.
Also, our current database collaborators may choose not to renew their
agreements upon expiration. Our database revenues are also affected by the
extent to which existing collaborators expand their agreements with us to
include our new database products and the extent that existing collaborators
reduce the number of products or services for which they subscribe. Some of our
database agreements require us to meet performance obligations. A database
collaborator can terminate its agreement before the end of its scheduled term if
we breach the agreement and fail to cure the breach within a specified period.
OUR LONGER-TERM STRATEGY FOR PROFITABILITY INCLUDES LICENSES UNDER OUR
GENE-RELATED INTELLECTUAL PROPERTY TO OUR DATABASE COLLABORATORS, BUT THESE
LICENSES WILL NOT CONTRIBUTE TO REVENUES FOR SEVERAL YEARS, AND MAY NEVER RESULT
IN REVENUES
Part of our strategy is to license to database collaborators our know how
and patent rights associated with the genetic information in our proprietary
databases, for use in the discovery and development of potential pharmaceutical,
diagnostic or other products. Any potential product that is the subject of such
a license will require several years of further development, clinical testing
and regulatory approval before commercialization. Therefore, milestone or
royalty payments from these collaborations may not contribute to revenues for
several years, if at all.
IF WE ARE NOT ABLE TO GENERATE SIGNIFICANT REVENUES FROM EXPRESSION DATABASES
AND MICROARRAY SERVICES, WE MAY NOT BE PROFITABLE
We acquired Synteni, Inc. in January 1998 to provide microarray services
and to generate information for our gene expression database. The contribution
of our microarray operations to our operating results depends on whether we can
continue to obtain high-volume customers for microarray services and expression
databases, whether we can continue to increase our microarray production
capacity in a timely manner and with consistent volumes and quality, and the
costs associated with increasing our microarray production capacity.
OUR OPERATING RESULTS ARE UNPREDICTABLE, WHICH MAY CAUSE OUR STOCK PRICE TO
DECLINE AND RESULT IN LOSSES TO INVESTORS
Our operating results are unpredictable and may fluctuate significantly
from period to period, which may cause our stock price to decline and result in
losses to investors. Some of the factors that could cause our operating results
to fluctuate include:
- changes in the demand for our products and services, including our
database business;
- the introduction of competitive databases or services, including databases
of publicly available, or public domain, genetic information;
- the nature, pricing and timing of other products and services provided to
our collaborators;
- acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses;
- losses and expenses related to our investments in joint ventures and
businesses;
- regulatory developments or changes in public perceptions relating to the
use of genetic informa-tion and the diagnosis and treatment of disease based on
genetic information;
- changes in intellectual property laws that affect our rights in genetic
information that we sell;
- payments of milestones, license fees or research payments under the terms
of our increasing number of external alliances; and
- expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights, including the lawsuits filed by
Affymetrix, Inc.
We have significant fixed expenses, due in part to our need to continue to
invest in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would harm our operating
results for that period. Forecasting operating and integration expenses for
acquired businesses may be particularly difficult, especially where the acquired
business focuses on technologies that do not have an established market. We
believe that period-to-period comparisons of our financial results will not
necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount.
OUR INDUSTRY IS INTENSELY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, OUR
REVENUES MAY DECLINE
We compete in markets that are new, intensely competitive, rapidly
changing, and fragmented. Many of our current and potential competitors have
greater financial, human and other resources than we do. If we cannot respond
quickly to changing customer requirements, secure intellectual property
positions, or adapt quickly and obtain access to new and emerging technologies,
our revenues may decline. Our competitors include
- Celera Genomics Group of PE Corporation,
- CuraGen Corporation,
- Gene Logic Inc.,
- Human Genome Sciences, Inc.,
- major pharmaceutical companies, and
- universities and other research institutions, including The SNP
Consortium, which is funded by a number of pharmaceutical companies, and those
receiving funding from the federally funded Human Genome Project.
The human genome contains a finite number of genes. Our competitors may
seek to identify, sequence and determine the biological function of numerous
genes in order to obtain a proprietary position with respect to new genes.
In addition, we face competition from companies who are developing and may
seek to develop new technologies for discovering the functions of genes, gene
expression information, including microarray technologies, discovery of
variations among genes and related technologies. Also, if we are unable to
obtain the technology we currently use or new advanced technology on acceptable
terms, but other companies are, we will be unable to compete.
We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data. If pharmaceutical companies
and researchers are able to manage their own genomic data, they may not
subscribe to our databases.
Extensive research efforts resulting in rapid technological progress
characterize the genomics industry. To remain competitive, we must continue to
expand our databases, improve our software, and invest in new technologies. New
developments will probably continue, and discoveries by others may render our
services and potential products noncompetitive.
IF PATENT POSITIONS BECOME PUBLICLY AVAILABLE, OR IF OUR COMPETITORS PUBLICLY
DISCLOSE THEIR DISCOVERIES, OUR REVENUES COULD DECLINE
Our competitors may discover and establish patent positions with respect to
the genes in our databases. Our competitors and other entities who engage in
discovering the way in which genes are ordered in DNA may also make the results
of their sequencing efforts publicly available. Currently, academic institutions
and other laboratories participating in the Human Genome Project make their gene
sequence information available through a number of publicly available databases,
including the GenBank database. Also, Celera Genomics Group has publicly stated
that it is committed to make available to the public basic human sequence data.
The public availability of these discoveries or resulting patent positions
covering substantial portions of the human genome could reduce the potential
value of our databases to our collaborators. It could also impair our ability to
realize royalties or other revenue from any commercialized products based on
this genetic information.
WE ARE INVOLVED IN PATENT LITIGATION, WHICH IF NOT RESOLVED FAVORABLY COULD
REQUIRE US TO PAY DAMAGES AND STOP SELLING AND USING MICROARRAY PRODUCTS
We are currently involved in patent litigation. If we lose this litigation
we could be prevented from producing and using our microarray products and be
required to pay damages. In January 1998, Affymetrix filed a lawsuit in federal
court alleging infringement of U.S. patent number 5,445,934 by both Synteni and
Incyte. The complaint alleges that Synteni and Incyte infringed the '934 patent
by making, using, selling, importing, distributing or offering to sell high
density arrays in the United States and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 patent and seeks damages, costs, attorneys'
fees and interest. Affymetrix also requests triple damages based on allegedly
willful infringement.
In September 1998, Affymetrix filed an additional lawsuit alleging
infringement of U.S. patent numbers 5,744,305 and 5,800,992 by Synteni and
Incyte. The complaint alleges that Synteni and Incyte infringed the '305 patent
has been infringed by Synteni's and Incyte's making, using, selling, importing,
distributing or offering to sell high density arrays in the United States. It
also alleges that Synteni and Incyte infringed the '992 patent by using their
GEM microarray technology to conduct gene expression monitoring using two-color
labeling and that this infringement was willful. Affymetrix had sought a
preliminary injunction enjoining Synteni and Incyte from using GEM microarray
technology to conduct this kind of gene expression monitoring, and a permanent
injunction enjoining Synteni and Incyte from further infringing the '305 and
'992 patents.
The lawsuits were initially filed in the United States District Court for
the District of Delaware. In November 1998, the court granted Incyte's motion to
transfer the suits to the United States District Court for the Northern District
of California. Affymetrix's request for a preliminary injunction was denied in
May 1999. The court has scheduled a pretrial hearing in November 2000 to
determine how to construe the patent claims that will be litigated in trial, but
has not scheduled any other pretrial hearings or set a trial date.
In April 1999, the Board of Patent Appeals and Interferences of the United
States Patent and Trademark Office declared interferences between pending patent
applications licensed exclusively to us and the Affymetrix '305 and '992
patents. The Board of Patent Appeals and Interferences invokes an interference
proceeding when more than one patent applicant claims the same invention and,
during the proceeding, evaluates all relevant facts and makes a determination as
to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences ruled that patents
licensed by Incyte and Synteni from Stanford University were not entitled to
priority over corresponding claims in the two Affymetrix patents. We are seeking
de novo review in the United States District Court for the Northern District of
California.
We believe we have meritorious defenses and intend to defend these suits
vigorously. However, our defense may be unsuccessful. At this time, we cannot
reasonably estimate the possible range of any loss resulting from these suits
due to uncertainty about the ultimate outcome. We have spent and expect to
continue to spend a significant amount of money and management time on this
litigation. Also, if we are required to license any technology as a result of
these suits, we do not know whether we will be able to do so on commercially
acceptable terms, if at all. This litigation may also affect our potential
customers' willingness to use our microarray services and expression databases,
which could affect our revenues.
IF WE ARE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS, THEY COULD
BE COSTLY AND DISRUPT OUR BUSINESS
The technology that we use to develop our products, and the technology that
we incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses.
As is typical in the genomics, biotechnology and software industries, we
have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. We believe that we are not infringing the
patent rights of any third parties. Except for Affymetrix, no third party has
filed a patent lawsuit against us.
We may, however, be involved in future lawsuits alleging patent
infringement or other intellectual property rights violations. In addition,
litigation may be necessary to:
- assert claims of infringement;
- enforce our patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary rights
of others.
We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation can be very costly and can divert management's
efforts. An adverse determination may subject us to significant liabili-ties or
require us to seek licenses to other parties' patents or proprietary rights. We
may also be restricted or pre-vented from manufacturing or selling our products
and services. Further, we may not be able to obtain any necessary licenses on
acceptable terms, if at all.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY RESULT IN ITS
UNAUTHORIZED USE AND A LOSS OF REVENUE
Our business and competitive position depend upon our ability to protect
our proprietary database information and software technology. Despite our
efforts to protect this information and technology, unauthorized parties may
attempt to obtain and use information that we regard as proprietary. Although
our database subscription agreements require our subscribers to control access
to our databases, policing unauthorized use of our databases and software may be
difficult.
We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin working
for us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.
Our means of protecting our proprietary rights may not be adequate, and our
competitors may:
- independently develop substantially equivalent proprietary information and
techniques;
- otherwise gain access to our proprietary information; or
- design around patents issued to us or our other intellectual property.
IF THE INVENTIONS DESCRIBED IN OUR PATENT APPLICATIONS ON FULL-LENGTH OR PARTIAL
GENES ARE FOUND TO BE UNPATENTABLE, OUR ISSUED PATENTS ARE NOT ENFORCED OR OUR
PATENT APPLICATIONS CONFLICT WITH PATENT APPLICATIONS FILED BY OTHERS, OUR
REVENUES MAY DECLINE
One of our strategies is to file patent applications on what we believe to
be novel full-length and partial genes and SNPs obtained through our efforts to
discover the order, or sequence, of the molecules, or bases, of genes. We have
filed U.S. patent applications in which we claimed partial sequences of some
genes. We have also applied for patents in the U.S. and other countries claiming
full-length gene sequences associated with cells and tissues involved in our
gene sequencing program. We hold a number of issued U.S. patents on full-length
genes and one issued U.S. patent claiming multiple partial gene sequences. While
the United States Patent and Trademark Office has issued patents covering
full-length genes, partial gene sequences and SNPs, the Patent and Trademark
Office may choose to interpret new guidelines for the issuance of patents in a
more restrictive manner in the future, which could impact the issuance of our
pending patent applications. We also do not know whether or how courts may
enforce our issued patents, if that becomes necessary. If a court finds these
types of inventions to be unpatentable, or interprets them narrowly, the value
of our patent portfolio and possibly our revenues could be diminished.
We believe that some of our patent applications claim genes and partial
sequences of genes that may also be claimed in patent applications filed by
others. In some or all of these applications, a determination of priority of
inventorship may need to be decided in an interference before the United States
Patent and Trademark Office, before a patent is issued. If a full-length or
partial length sequence for which we seek a patent is issued to one of our
competitors, we may be unable to include that full-length or partial length
sequence on a microarray or in a library of bioreagents. This could result in a
loss of revenues.
IF THE EFFECTIVE TERM OF OUR PATENTS IS DECREASED DUE TO CHANGES IN THE U.S.
PATENT LAWS OR IF WE NEED TO REFILE SOME OF OUR PATENT APPLICATIONS, THE VALUE
OF OUR PATENT PORTFOLIO AND THE REVENUES WE DERIVE FROM IT MAY BE DECREASED
The value of our patents depends in part on their duration. A shorter
period of patent protection could lessen the value of our rights under any
patents that we obtain and may decrease the revenues we derive from our patents.
The U.S. patent laws were amended in 1995 to change the term of patent
protection from 17 years from patent issuance to 20 years from the earliest
effective filing date of the application. Because the average time from filing
to issuance of biotechnology applications is at least one year and may be more
than three years depending on the subject matter, a 20-year patent term from the
filing date may result in substantially shorter patent protection. Also, we may
need to refile some of our applications claiming large numbers of gene sequences
and, in these situations, the patent term will be measured from the date of the
earliest priority application. This would shorten our period of patent
exclusivity and may decrease the revenues that we might obtain from the patents.
INTERNATIONAL PATENT PROTECTION IS PARTICULARLY UNCERTAIN, AND IF WE ARE
INVOLVED IN OPPOSITION PROCEEDINGS IN FOREIGN COUNTRIES, WE MAY HAVE TO EXPEND
SUBSTANTIAL SUMS AND MANAGEMENT RESOURCES
Biotechnology patent law outside the United States is even more uncertain
than in the United States and is currently undergoing review and revision in
many countries. Further, the laws of some foreign countries may not protect our
intellectual property rights to the same extent as U.S. laws. We may participate
in opposition proceedings to determine the validity of our foreign patents or
our competitors foreign patents, which could result in substantial costs and
diversion of our efforts.
IF OUR NEW PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND
DRUG RESPONSE ARE NOT SUCCESSFUL, THEY MAY NOT GENERATE SIGNIFICANT REVENUES OR
RESULT IN PROFITABLE OPERATIONS
We recently began to focus part of our business on developing
information-based and other products and services to assist pharmaceutical
companies in a new and unproven area: the identification and correlation of
variation in genetic composition to disease and drug response. We will incur
significant costs over the next several years in expanding our research and
development in this area. These activities may never generate significant
revenues or profitable operations.
This new aspect of our business will focus on single nucleotide
polymorphisms or SNPs, one type of genetic variation. The role of SNPs in
disease and drug response is not fully understood, and relatively few, if any,
therapeutic or diagnostic products based on SNPs have been developed and
commercialized. Among other things, demand in this area may be adversely
affected by ethical and social concerns about the confidentiality of
patient-specific genetic information and about the use of genetic testing for
diagnostic purposes.
Except for a few anecdotal examples, there is no proof that SNPs have any
correlation to diseases or a patient's response to a particular drug or class of
drug. Identifying statistically significant correla-tions is time-consuming and
could involve the collection and screening of a large number of patient samples.
We do not know if the SNPs we have discovered to date are suitable for these
correlation studies because the variations we discovered may not occur
frequently enough to justify use by a pharmaceutical company.
Our success in this area will also depend upon our ability to develop, use
and enhance new and relatively unproven technologies. Among other things, we
will need to continue to improve the throughput of our SNP-discovery technology.
We may not be able to achieve these necessary improvements, and other factors
may impair our ability to develop our SNP-related products and services in time
to be competitively available.
IF OUR STRATEGIC INVESTMENTS RESULT IN LOSSES, OUR EARNINGS MAY DECLINE
We make strategic investments in joint ventures or businesses that
complement our business. These investments may:
- often be made in securities lacking a public trading market or subject to
trading restrictions, either of which increases our risk and reduces the
liquidity of our investment;
- require us to record losses and expenses related to our ownership
interest, such as the losses we reported in 1997, 1998 and 1999 related to our
investment in diaDexus, LLC;
- require us to record charges related to the acquisition of in-process
technologies or for the impairment in the value of the securities underlying our
investment; and
- require us to invest greater amounts than anticipated or to devote
substantial management time to the management of research and development
relationships and joint ventures.
The market values of many of these investments fluctuate significantly. We
evaluate our long-term equity investments for impairment of their values on a
quarterly basis. Impairment could result in future charges to our earnings.
These losses and expenses may exceed the amounts that we anticipated.
BECAUSE OUR SALES CYCLE IS LENGTHY, WE MAY SPEND A LOT OF TIME AND MONEY TRYING
TO OBTAIN NEW OR RENEWED SUBSCRIPTIONS TO OUR PRODUCTS AND SERVICES BUT MAY BE
UNSUCCESSFUL, WHICH COULD HURT OUR PROFITABILITY
Our ability to obtain new subscribers for our databases, software tools and
microarray and other services or to obtain renewals or additions to existing
subscriptions depends upon prospective subscribers' perceptions that our
products and services can help accelerate drug discovery efforts. Our database
sales cycle is typically lengthy because we need to edu-cate our potential
subscribers and sell the benefits of our tools and services to a variety of
constituencies within potential subscriber companies. In addition, each database
subscription and microarray services agreement involves the negotiation of
unique terms. We may expend substantial funds and management effort with no
assurance that a new, renewed or expanded subscription or services agreement
will result. These expenditures, without increased revenues, will negatively
impact our profitability. Actual and proposed consolidations of pharmaceutical
companies have affected the timing and progress of our sales efforts. We expect
that future proposed consolidations will have similar effects.
IF WE ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS, OUR REVENUES
COULD DECLINE AND WE COULD LOSE OUR CUSTOMERS' GOODWILL
Our databases require software support and will need to incorporate
features determined by database collaborators. If we experience delays or
difficulties in implementing our database software or collaborator-requested
features, we may be unable to service our collaborators, which could result in a
loss of revenues and customer goodwill.
WE HAVE ENCOUNTERED DIFFICULTIES INTEGRATING COMPANIES WE ACQUIRED, AND IF IN
THE FUTURE WE CANNOT SMOOTHLY INTEGRATE BUSINESSES WE ACQUIRE, OUR OPERATIONS
AND FINANCIAL RESULTS COULD BE HARMED
As part of our business strategy, we may acquire other assets, technologies
and businesses. Our past acquisitions have involved and our future acquisitions
may involve risks such as the following:
- we may be exposed to unknown liabilities of acquired companies;
- our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
- we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and diverting
management's time and attention;
- we may be unable to integrate or complete the development and application
of acquired technology;
- we may experience difficulties in establishing and maintaining uniform
standards, controls, pro-ce-dures and policies;
- our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired businesses;
- we may be unable to retain key employees of the acquired businesses;
- we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
- our stockholders may be diluted if we pay for the acquisition with equity
securities.
In addition, if we acquire additional businesses that are not located near
our Palo Alto, California head-quarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.
IF WE ARE UNABLE TO MANAGE EFFECTIVELY OUR GROWTH, OUR OPERATIONS AND ABILITY TO
SUPPORT OUR CUSTOMERS COULD BE AFFECTED, WHICH COULD HARM OUR REVENUES
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth has placed, and may
continue to place, a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems and to hire, train and manage our employees.
In addition, we must continue to invest in customer support resources as
the number of database collaborators and their requests for support increase.
Our database collaborators typically have world-wide operations and may require
support at multiple U.S. and foreign sites. To provide this support, we may need
to open offices in additional locations, which could result in additional
burdens on our systems and resources.
WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL, AND
THE LOSS OF THE SERVICES OF ANY OF OUR KEY EMPLOYEES WOULD AFFECT OUR ABILITY TO
ACHIEVE OUR OBJECTIVES
We are highly dependent on the principal members of our management,
operations and scientific staff. Our product development, operations and
marketing efforts would be delayed or curtailed if we lose the services of any
of these people.
Our future success also will depend in part on the continued service of our
executive management team, key scientific, software, bioinformatics and
management personnel and our ability to identify, hire, train and retain
additional personnel, including customer service, marketing and sales staff. We
experience intense competition for qualified personnel. If we are unable to
continue to attract, train and retain these per-sonnel, we may be unable to
expand our business.
WE RELY ON A SMALL NUMBER OF SUPPLIERS OF PRODUCTS WE NEED FOR OUR BUSINESS, AND
IF WE ARE UNABLE TO OBTAIN SUFFICIENT SUPPLIES, WE WILL BE UNABLE TO COMPETE
EFFECTIVELY
Currently we use gene sequencing machines supplied by Molecular Dynamics, a
subsidiary of Amersham Pharmacia Biotech, Ltd., and chemicals used in the
sequencing process, called reagents, supplied by Sigma-Aldrich, Inc. in our gene
sequencing operations. If we are not able to obtain additional machines or an
adequate supply of reagents or other materials at commercially reasonable rates,
our ability to identify genes or genetic variations would be slower and more
expensive.
IF THE INFORMATION WE OBTAIN FROM THIRD-PARTY DATA SOURCES IS CORRUPT OR
VIOLATES THE LAW, OUR REVENUES AND OPERATING RESULTS COULD DECLINE
We rely on and include in our databases scientific and other data supplied
by others, including publicly available information from sources such as the
Human Genome Project. This data could contain errors or other defects, which
could corrupt our databases. In addition, we cannot guarantee that our data
sources acquired this information in compliance with legal requirements. If this
data caused database corruption or violated legal requirements, we would be
unable to sell subscriptions to our databases. These lost sales would harm our
revenue and operating results.
SECURITY RISKS IN ELECTRONIC COMMERCE OR UNFAVORABLE INTERNET REGULATIONS MAY
DETER FUTURE USE OF OUR PRODUCTS AND SERVICES, WHICH COULD RESULT IN A LOSS OF
REVENUES
We plan to make our products available through our website on the Internet
and have recently introduced our first online product, the LifeSeq Gene-by-Gene
program. Our ability to provide secure transmissions of confidential information
over the Internet may limit online use of our products and services by our
database collaborators as we may be limited by our inability to provide secure
transmissions of confidential information over the Internet. Advances in
computer capabilities and new discoveries in the field of cryptography may
comprise the security measures we use to protect our website, access to our
databases, and transmissions to and from our website. If our security measures
are breached, our proprietary information or confidential information about our
collaborators could be misappropriated. Also, a security breach could result in
interruptions in our operations. The security measures we adopt may not be
sufficient to prevent breaches, and we may be required to incur significant
costs to protect against security breaches or to alleviate problems caused by
breaches. Further, if the security of our website, or the website of another
company, is breached, our collaborators may no longer use the Internet when the
transmission of confidential information is involved. For example, recent
attacks by computer hackers on major e-commerce websites and other Internet
service providers have heightened concerns regarding the security and
reliability of the Internet.
Because of the growth in electronic commerce, the United States Congress
has held hearings on whether to further regulate providers of services and
transactions in the electronic commerce market. The federal government could
enact laws, rules and regulations that would affect our business and operations.
Individual states could also enact laws regulating the use of the Internet. If
enacted, these federal and state laws, rules and regulations could require us to
change our online business and operations, which could limit our growth and our
development of our online products.
BECAUSE OUR ACTIVITIES INVOLVE THE USE OF HAZARDOUS MATERIALS, WE MAY BE SUBJECT
TO COSTLY ENVIRONMENTAL LIABILITY THAT COULD EXCEED OUR RESOURCES
Our research and development involves the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and waste products. Although we believe that our
safety procedures for handling and disposing of these materials comply with
legally prescribed standards, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of an
accident, we could be held liable for damages, and this liability could exceed
our resources.
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environ-mental laws and regulations.
BECAUSE OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES, OUR REVENUES MAY FLUCTUATE SUBSTANTIALLY DUE TO
REDUCTIONS AND DELAYS IN RESEARCH AND DEVELOPMENT EXPENDITURES
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries as well as to the academic community. Accordingly, our
success will depend in large part upon the success of the companies within these
industries and their demand for our products and services. Our operating results
may fluctuate substantially due to reductions and delays in research and
development expenditures by companies in these industries or by the academic
community. These reductions and delays may result from factors such as:
- changes in economic conditions;
- consolidation in the pharmaceutical industry;
- changes in the regulatory environment affecting health care and health
care providers;
- pricing pressures;
- market-driven pressures on companies to consolidate and reduce costs; and
- other factors affecting research and development spending.
These factors are not within our control.
IF A NATURAL DISASTER OCCURS, WE MAY HAVE TO CEASE OR LIMIT OUR BUSINESS
OPERATIONS
We conduct our database, sequencing and a significant portion of our other
activities at our facilities in Palo Alto, California, and conduct our
microarray-related activities at our facilities in Fremont, California. Both
locations are in a seismically active area. Although we maintain business
interruption insurance, we do not have or plan to obtain earth-quake insurance.
A major catastrophe, such as an earthquake or other natural disaster, could
result in a pro-longed interruption of our business.
WE HAVE A LARGE AMOUNT OF DEBT AND OUR DEBT SERVICE OBLIGATIONS MAY PREVENT US
FROM TAKING ACTIONS THAT WE WOULD OTHERWISE CONSIDER TO BE IN OUR BEST
INTERESTS.
As of June 30, 2000, we had
- total consolidated debt of approximately $203.3 million, and
- stockholders' equity of approximately $601.9 million, and
- a deficiency of earnings available to cover fixed charges of $13.5 million
for the six months ended June 30, 2000.
A variety of uncertainties and contingencies will affect our future
performance, many of which are beyond our control. We may not generate
sufficient cash flow in the future to enable us to meet our anticipated fixed
charges, including our debt service requirements with respect to the $200
million of convertible subordinated notes we sold in February 2000. The
following table shows the aggregate amount of our principal and interest
payments due in each of the five years:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Aggregate Principal Aggregate Interest
---- -------------------- -------------------
2000 $ 796,000 $ 5,531,000
2001 -- 11,000,000
2002 -- 11,000,000
2003 -- 11,000,000
2004 -- 11,000,000
</TABLE>
Our substantial leverage could have significant negative consequences for
our future operations, including:
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our ability to obtain additional financing;
- requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the amount of
our expected cash flow available for other purposes, including working capital
and capital expenditures;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; or
- placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
investments in short-term marketable securities and its convertible subordinated
notes. The Company's investment policy calls for investment in short term, low
risk instruments. As of June 30, 2000, investment in marketable securities was
$242.8 million. Due to the nature of these investments and notes, if market
interest rates were to increase immediately and uniformly by 10% from levels as
of June 30, 2000, the change in the fair value of the portfolio would not be
material.
The Company is exposed to equity price risks on the marketable portion of equity
securities included in its portfolio of investments and long-term investments,
entered into to further its business and strategic objectives. These investments
are in small capitalization stocks in the pharmaceutical/biotech industry
sector, in companies with which the Company has research and development or
licensing agreements. The Company typically does not attempt to reduce or
eliminate its market exposure on these securities. As of June 30, 2000,
long-term investments were $44.5 million.
The Company typically does not hedge its foreign currency exposure. Management
does not believe that the Company's exposure to foreign currency rate
fluctuations is material.
<PAGE>
PART II: OTHER INFORMATION
ITEM 1 Legal Proceedings
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in
the United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the "'934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees and
interest. Affymetrix further requests that any such damages be trebled based on
its allegation of willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of the U.S. patent number
5,800,992 (the "'992 Patent") and U.S. patent number 5,744,305 (the "'305
Patent") by both Synteni and Incyte. The complaint alleges that the '305 Patent
has been infringed by the making, using, selling, importing, distributing or
offering to sell in the United States high density arrays by Synteni and Incyte,
that the '992 Patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling, and that such infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. The court has scheduled a pretrial hearing in
November 2000 to determine how to construe the patent claims that will be
litigated in trial, but has not scheduled any other pretrial hearings or set a
trial date.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California.
Incyte and Synteni believe they have meritorious defenses and intend
to defend the suits vigorously. However, there can be no assurance that Incyte
and Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of this suit or the outcome thereof would be made available
on commercially acceptable terms, if at all.
<PAGE>
ITEM 2 Changes in Securities
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
ITEM 3 Defaults Upon Senior Securities
None
ITEM 4 Submission of Matters to a Vote of Security Holders
On June 5, 2000, the Company held its Annual Meeting of Stockholders.
The following actions were taken at the annual meeting:
1. The following Directors were elected:
<TABLE>
<CAPTION>
<S> <C> <C>
For Withheld
---------- --------
a. Roy A. Whitfield . . 24,178,558 65,461
b. Randal W. Scott. . . 24,178,573 65,446
c. Barry M. Bloom . . . 24,186,841 57,178
d. Jeffrey J. Collinson 24,188,192 55,827
e. Frederick B. Craves. 24,188,230 55,789
f. Jon S. Saxe. . . . . 24,187,095 56,924
</TABLE>
2. A proposal to amend the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock.
<TABLE>
<CAPTION>
<S> <C> <C>
For. . . . Against Abstain
---------- --------- -------
21,598,627 2,619,482 25,370
</TABLE>
3.
<TABLE>
<CAPTION>
A proposal to amend the Company's Certificate of Incorporation to change
the name of the Corporation.
<S> <C> <C>
For. . . . Against Abstain
---------- ------- -------
24,188,972 29,034 26,013
</TABLE>
<TABLE>
<CAPTION>
4. A proposal to amend the Company's 1991 Stock Plan.
<S> <C> <C>
For. . . . Against Abstain
---------- --------- -------
19,099,114 5,093,456 50,909
</TABLE>
<TABLE>
<CAPTION>
5. A proposal to amend the Company's 1997 Employee Stock Purchase Plan.
<S> <C> <C>
For. . . . Against Abstain
---------- ------- -------
23,859,824 338,753 45,442
</TABLE>
6. The selection of the Company's independent auditors was ratified
<TABLE>
<CAPTION>
.
<S> <C> <C>
For. . . . Against Abstain
---------- ------- -------
24,198,504 21,680 23,835
</TABLE>
<PAGE>
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K.
a) Exhibits
See Exhibit Index on Page 31
b) Reports on Form 8-K
None
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCYTE GENOMICS, INC.
Date: August 11, 2000 By: /s/ Roy A. Whitfield
-----------------------
Roy A. Whitfield
Chief Executive Officer
Date: August 11, 2000 By: /s/ John M. Vuko
-------------------
John M. Vuko
Chief Financial Officer
<PAGE>
INCYTE GENOMICS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. EXHIBIT PAGE
--- -------------------------------------- ----
<S> <C> <C> <C>
xxx 27 Financial Data Schedule, June 30, 2000 32
</TABLE>
